Compensation and Competition for Talent: Talent Scarcity or Incentives?
44 Pages Posted: 9 Jan 2013 Last revised: 25 Feb 2014
Date Written: October 27, 2013
We show that long-term compensation is associated with higher pay in the financial industry and the legal sector. Then, using a detailed survey of law school graduates, we explore why firms use long-term compensation. We find that individuals with jobs that make them highly visible and that allow them to shift effort from tasks that are value-enhancing for the employer to tasks that are self-enhancing are more likely to receive long-term compensation, especially in markets with high competition for talent. High-ability individuals receive higher pay, but are not more likely to be awarded long-term compensation. These findings suggest that long-term compensation arises in an optimal contract, because competition for talent accentuates agency problems in the allocation of effort and may create retention problems.
Keywords: Competition for talent, retention, optimal contracts, legal labor market, financial labor market
JEL Classification: G34, J22, J31, J33, J41, J44, M52
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